Government Lending and Monetary Policy

The financial dimension of the current contraction has brought a historic expansion in government lending to financial market participants, mostly through an expanding array of Federal Reserve (Fed) initiatives. This contrasts with the Fed's typical response to recent recessions that has been l...

Full description

Saved in:
Bibliographic Details
Published in:Business economics (Cleveland, Ohio) Ohio), 2009-07, Vol.44 (3), p.136-142
Main Author: LACKER, JEFFREY M.
Format: Article
Language:English
Subjects:
Balance sheets
Bank loans
Business and Management
Central banks
Consumer spending
Credit
Credit policies
Credit policy
Credit risk
Economic conditions
Economic stabilization
Economics
Economics and Finance
Federal Reserve Bank
Federal Reserve monetary policy
Financial institutions
Financial markets
Forecasts and trends
Government aid
Government lending
Households
Housing prices
Interest rates
Lines of credit
Loans
Macroeconomics
Market trend/market analysis
Monetary policy
Moral hazard
Mortgages
Original Article
Political Economy/Economic Systems
Recessions
Regulation of financial institutions
Securities markets
Studies
Treasuries
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The financial dimension of the current contraction has brought a historic expansion in government lending to financial market participants, mostly through an expanding array of Federal Reserve (Fed) initiatives. This contrasts with the Fed's typical response to recent recessions that has been limited to adjustments of the target Fed funds rate. Restrictions on credit supply and declines of creditworthiness have both contributed to the contraction in lending, although the latter cause has probably been underestimated relative to the former. Fed and other government lending programs have targeted particular sectors, altering the allocation of credit across markets. Also, targeted credit programs contribute to the moral hazard problem inherent in the provision of government-funded credit or guarantees. An alternative approach to monetary policy where the Fed funds target is essentially zero is purchasing Treasuries, which is likely to have little effect on the relative credit spreads on different financial instruments. However, given that targeted lending has taken place, it is critical that regulatory mechanisms be installed so that government regulation matches the scope of government support. Also, targeted lending by the Fed is in effect fiscal policy. Is this a legitimate role for a central bank, or should such lending be subject to legislative approval, with the Fed's role limited to monetary stability?
ISSN:0007-666X
1554-432X
DOI:10.1057/be.2009.12